Copper price slumps as traders take profits, where to next?
Diupdate
After appreciating over 28% in the past month-and-a-half, copper price slumped overnight. Increased media attention to the rally in copper prices led to the inevitable profit-taking on Wednesday, causing the metal to shed over 5%. The pullback has attracted some buyers to restock at lower prices, but many have stayed on the sidelines waiting for further declines. But many are likely wondering whether the rally seen in past weeks can resume.
Fundamentally, copper is regarded as a leading indicator of economic health given its use across many sectors. With resilient economic data globally, but predominantly in the US, markets have been pricing out the risks of a recession, allowing copper to flourish. Another huge tailwind for the metal has been its use in large data centres powering AI demand, which is expected to be a key driver of growth in the future. Despite their slowing demand, the electric vehicle industry has also added to copper’s strengthening. Some analysts at Bank of America even predict a demand deficit if demand for copper continues to grow, which would propel prices higher.
The pullback that started on Wednesday was partly due to the release of the Federal Reserve meeting minutes. The key takeaway from them is that the current policy rate is appropriate to ensure that inflation returns to 2%, which suggests not to expect any rate cuts anytime soon. But some members even went as far as to suggest that further tightening could be needed if price pressures fail to reduce significantly, especially given the continued tightness of the labour market. This spooked some investors, which gave copper traders the perfect excuse to start taking some profits.
Technically, the setup was primed for a reversal with the RSI having pushed to 78, a key level where corrections have taken place before. The selloff has found a short-term bottom at the 20-day SMA (4.72) which has tracked the lower bound of the price for the past three months. Whether the pullback will continue beyond this level will depend on how traders believe the higher-for-longer rate environment affects the sustainability of the copper price rally. As mentioned above, fundamentals support continued price appreciation so this pullback could be seen simply as a technical correction which will allow new buying interest to appear, even if sellers do take a little bit more room over the coming days.
Fundamentally, copper is regarded as a leading indicator of economic health given its use across many sectors. With resilient economic data globally, but predominantly in the US, markets have been pricing out the risks of a recession, allowing copper to flourish. Another huge tailwind for the metal has been its use in large data centres powering AI demand, which is expected to be a key driver of growth in the future. Despite their slowing demand, the electric vehicle industry has also added to copper’s strengthening. Some analysts at Bank of America even predict a demand deficit if demand for copper continues to grow, which would propel prices higher.
The pullback that started on Wednesday was partly due to the release of the Federal Reserve meeting minutes. The key takeaway from them is that the current policy rate is appropriate to ensure that inflation returns to 2%, which suggests not to expect any rate cuts anytime soon. But some members even went as far as to suggest that further tightening could be needed if price pressures fail to reduce significantly, especially given the continued tightness of the labour market. This spooked some investors, which gave copper traders the perfect excuse to start taking some profits.
Technically, the setup was primed for a reversal with the RSI having pushed to 78, a key level where corrections have taken place before. The selloff has found a short-term bottom at the 20-day SMA (4.72) which has tracked the lower bound of the price for the past three months. Whether the pullback will continue beyond this level will depend on how traders believe the higher-for-longer rate environment affects the sustainability of the copper price rally. As mentioned above, fundamentals support continued price appreciation so this pullback could be seen simply as a technical correction which will allow new buying interest to appear, even if sellers do take a little bit more room over the coming days.
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